Is Life Insurance a Commodity?

Is Life Insurance a Commodity?

As an early disclaimer, I no longer sell life insurance nor do I receive compensation when my clients purchase it.  As you will soon learn, I have tried to distance myself from the commodity side of the business over the last couple of years. 

I started my professional career in the insurance industry.  My first sales meeting was about “understanding” annuities.  I learned more about life insurance, annuities, and long-term care insurance in one weekend than I could have possible imagined.  More importantly, I learned that I was perfectly capable - and better prepared - to sell it than the next guy.  I didn't believe that then and I certainly don't believe it today.  

As such, my first experience in the financial services industry gave me an extremely bad taste about life insurance.  I learned - to my own detriment - that life insurance is a product that is sold and not bought.  For example, I was taught that variable life insurance was a product that you had to sell over and over again to the same client in order to keep the client from allowing the policy to lapse (i.e. to prevent the client from stopping making premium payments).  During that time, I lost a lot of respect for the insurance industry and came to the conclusion that life insurance was a commodity based business.  In other words, find the lowest cost product and buy it.  

Over the last couple of months, I have had the opportunity to review that premise and have learned that I was wrong.  Life insurance is a knowledge based and personal business that, when done right, requires an enormous amount of expertise to get the right product in the clients hands at the best possible price.  Let’s take a look at those two examples. 

High Net Worth

I had a client that was recently looking to do something “safe” with several million dollars that was parked in cash.  The option is was to purchase a high yield bond that matured in 5 to 7 years or price out an insurance policy.  I called a bunch of people to try to price out insurance policies that could be competitive on day one.  The problem that I found with many insurance policies is that they take at least several years before the cash in the policy can start to produce positive returns.  

However, that only applies to 'off the shelf' policies.  Accredited investors can actually purchase a private placement policy which guarantees positive returns in the first year.  Positive enough that given some strategic thinking about insurance the policy will actually compete quite well with a high risk bond that is paying 6.5 - 7%.  

Again, I spoke with numerous insurance agents.  Several of them were simply trying to sell a commodity.  However, a few of them knew their products extremely well and began tailoring solutions around the needs of the client rather than pushing a standard solution onto the client.  Not only did they know about the product, but they understood enough about it to make sure that it was the right fit given the unique situation for our client.  They also helped us think through future planning concerns and opportunities that may arise as a result of the policy design they came up with.  

Pension Maximization

I was also going through a potential pension maximization strategy with someone recently.  What did I learn?  I learned that some insurance companies underwrite you based on your age on the date of the application while others underwrite you based on when you have been approved (which could be 6 to 8 weeks later).  I also learned that some insurance companies will actually allow you to buy down your age.  In other words, if you are about to hit your birthday and want to pay lifetime premiums based on the younger age you can essentially pay the insurance company a year of premiums and be underwritten at the younger rate.  

I also learned that insurance agents can actually negotiate with carriers based on your underwriting to get you better rates.  Additionally, some insurance companies will underwrite you as a non-smoker if you prove for a year that you can quit smoking while others will only underwrite you assuming that you have not smoked for a period of month or years.  It is probably obvious on those lines that carriers view all kinds of peculiarities differently and thus you may get better pricing from one company than from another.  

In other words, if you are looking at the lowest cost on the face of it, you could actually end up paying more than if you choose to work with a good life insurance agent who knows all of this PLUS more. 

Bottom Line 

I work in the advice business and should have recognized that paying for quality advice typically saves you money.  However, I let my initial impression of insurance impact the way that I view the industry.  Finding a good qualilty life insurance agent will save you time, money and frustration in the process of trying to obtain the best possible coverage.  

Yes, I realize that it is hard to determine who offers quality but I have learned that you can sense quality in a person just like you can sense quality in a product.  Ask some questions, listen to what they have to say and more importantly how they say it.  Then don't be afraid to move on to the next person until you find that person that understands their line of business.   I promise you will be rewarded.  

Needless to say, my two solutions earlier were solved by the same person - an extremely professional agent.